Attorney General James Directs Unregistered Crypto Lending Platforms to Cease Operations In New York, Announces Additional Investigations

 

Today’s Announcement Follows Previous Warnings to Virtual Currency Platforms That Unlawful Activity Will Not Be Tolerated in New York

 New York Attorney General Letitia James today announced new efforts she is taking to protect New York investors, and the trading markets more generally, from exploitation by high-risk virtual currency schemes. Virtual or “crypto” currency lending platforms are essentially interest-bearing accounts that offer investors a rate of return on virtual currencies that are deposited with them. In New York, these lending platforms must register with the Office of the Attorney General (OAG) if they are operating within the state or offering their products to New Yorkers. Today, Attorney General James directed two of these lending platforms to immediately cease their unregistered and unlawful activities in New York and directed three other platforms to immediately provide information about their activities and products.

“Cryptocurrency platforms must follow the law, just like everyone else, which is why we are now directing two crypto companies to shut down and forcing three more to answer questions immediately,” said Attorney General James. “My office is responsible for ensuring industry players do not take advantage of unsuspecting investors. We’ve already taken action against a number of crypto platforms and coins that engaged in fraud or that illegally operated in New York. Today’s actions build on that work and send a message that we will not hesitate to take whatever actions are necessary against any company that thinks they are above the law.”

New York’s Martin Act sets forth a broad list of instruments that are declared to be securities and thus subject to its provisions: “any stocks, bonds, notes, evidences of interest or indebtedness or other securities…or negotiable documents of title, or foreign currency orders, calls or options therefor hereinafter called security or securities.” As courts have stated for almost a century, the Martin Act is a remedial statute, intended to protect the investing public, which means that its provisions — including those setting forth the definition of a “security” — are to be given a broad reading. Indeed, those defined categories of instruments are not exhaustive; other instruments or arrangements can, and have been, deemed securities under the law.

The nature and function of the most common virtual currency lending products or services demonstrate that they fall squarely within any of several categories of “security” under the Martin Act.

The virtual currency lending products at issue in today’s actions promise a fixed or variable rate of return to investors, and claim to deliver those returns by, among other things, trading with, or further lending those virtual assets. The most common virtual currency lending products or services are therefore securities under the Martin Act, including, in particular, those that accept virtual currencies in exchange for a rate of return. As a result, entities offering such products from New York or to New Yorkers must be registered with the OAG as brokers, dealers, or salespersons, unless exempted.

In 2021, the OAG’s Investor Protection Bureau continued the modernization of its registration operations, and updated its commodities personnel registration forms to collect information regarding virtual currencies. In March 2021, the OAG specifically notified the industry that those dealing in virtual currencies directly (such as trading platforms) must register with the Investor Protection Bureau, unless exempted.

In the past, Attorney General James has not hesitated to hold cryptocurrency trading platforms and token issuers accountable. Just last month, Attorney General James shut down the  cryptocurrency trading platform Coinseed, Inc. after she filed a lawsuit against the company earlier this year.

On that same day last month, Attorney General James secured a recovery of nearly half a billion dollars unlawfully obtained from investors who financially backed GTV Media Group, Inc. and its parent company, Saraca Media Group, Inc. In addition to unlawfully selling stocks, the company was selling two digital instruments promoted as cryptocurrencies without registering in New York state.

In February, Attorney General James announced an agreement with Bitfinex, Tether, and related entities that ended all of their trading activity in the state of New York, imposed an $18.5 million penalty on the companies, and increased transparency.